Question

Andretti Company has a single product called a Dak. The company normally produces and sells 83,000 Daks each year at a selling price of $60 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	9.50
Direct labor		9.00
Variable manufacturing overhead		1.80
Fixed manufacturing overhead		9.00	($747,000 total)
Variable selling expenses		3.70
Fixed selling expenses		3.50	($290,500 total)
Total cost per unit	$	36.50

Required:

2. Assume again that Andretti Company has sufficient capacity to produce 103,750 Daks each year. A customer in a foreign market wants to purchase 20,750 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $4.70 per unit and an additional $14,525 for permits and licenses. The only selling costs that would be associated with the order would be $2.40 per unit shipping cost. What is the break-even price per unit on this order?

3. The company has 600 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price?

4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period.

a. How much total contribution margin will Andretti forgo if it closes the plant for two months?

b. How much total fixed cost will the company avoid if it closes the plant for two months?

c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?

5. An outside manufacturer has offered to produce 83,000 Daks and ship them directly to Andretti’s customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. What is Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer?

Answer 1

2)Breakeven cost for 20,750 Daks

Variable Costs:($9.5+$9.00+$1.80)	$20.30
Import Duties Per unit	$4.70
Permits and Licenses Per unit($14,525/20,750)	$0.70
Shipping cost per unit	$2.40
Breakeven cost per unit	$28.10

3)Relevant cost per unit would be just the variable selling expenses as these cannot be sold normally.

Therefore Relevan cost=variable selling expenses =$3.70

4)First Lets Calaculate Contribution Margin

Sales	$60
Less:Variable Costs
Direct Material	$9.50
Direct Labor	$9.00
Variable Manufacturing Overheads	$1.80
Variable Selling Expenses	$3.70
Contribution Margin	$36.00

normal annual sales =83,000 daks

For two months sales would be =83000*2/12=13,833

25% of normal capacity of two month period=13,833*25%=3,458 units

contribution lost would be =3,458 units * $36.00=$124,488

Fixed Manufacturing Costs=$747,000*2/12*35%=$43,575

Savings In fixed Manufacturing Cost=$747,000*2/12*65%=$80,925

fixed selling expenses =$290,500*2/12*80%=$38,733

Savings In fixed Selling Expenses=$290,500*2/12*20%=$9,684

Total Savings Fixed Costs=$80,925+$9,684=$90,609

Contribution Margin Lost		$124,488
Fixed Costs
Fixed Manufacturing overheads cost	$43,575
Fixed selling Expenses	$38,733	$82,308
Net Disadvantage of closing the plant		$206,796

5)

Variable Manufacturing Costs	$1,684,900
Fixed Manufacturing Overheads (reduced by 30%)(747,000*30%)	$224,100
Variable Selling Expense(1/3 rd saved)($3.70*83,000*1/3)	$102,367
Total Costs Avoided	$2,011,367
No. Of Units	83,000
Avoidable Cost per Unit	$24.23